Notes from the Institute’s Director of Research on some significant papers and contributions produced in 2016 under the INET rubric

Perhaps the authorities in ’s-Hertogenbosch in the Netherlands were just lucky. Or maybe, just maybe, history really does proceed in spirals.

In any case, as the infant New Year of 2016 crept in, the art museum in the little town in Brabant was putting the finishing touches on a grandiose exhibition to mark the 500th anniversary of its most famous son, Hieronymus Bosch. As the show opened, who would have suspected that a late medieval painter’s nightmarish depictions of the end of the world and the torments of Hell were about to become visual tracts for our times, presaging the dramatic upheavals now shaking to their foundations two of the world’s oldest democracies – the UK and the US – and threatening to send the Eurozone and perhaps even the entire European Union into a death spiral?

With so many policymakers and elites in the advanced countries stuck in a state of denial – with some even celebrating, save in regard to international trade, a revival of the free market fundamentalism that did so much to bring on the 2008 disaster – it seems like a good idea to look back on some areas over the last year in which the Institute for New Economic Thinking’s research helped bring important themes into focus, and how its work might help advance the wave of reappraisals that now impends.

First a word of caution: INET’s founders set it a simple, yet broad challenge: changing economic theory to better comprehend the course of the economy and the crises imperiling the world economy.

No brief review can do justice to the multiplicity of ways the Institute has tried to accomplish this. INET research covers many areas that are, at best, indirectly related to the turmoil of 2016, and includes many more researchers than can possibly be mentioned here. For example, econometric investigations into short-time series or how to cope with endogeneity in models, as discussed in Irene Hueter’s critical study of latent instrumental variables, will certainly be of great value to researchers, but in this review they have to be left to the side.

Also INET has a number of specialized research programs (including those led by Joseph Stiglitz, Roman Frydman, and James Heckman and Steven Durlauf) that cannot be adequately represented here. The same holds for research at other institutions partnered with INET, such as INET Oxford and INET Cambridge, and INET backed education programs, including the just renovated History of Economic Thought website. Even much of the output from the other main INET Research Programs most immediately relevant, such as the Financial Stability Program — run by Robert Johnson, Adair Turner, and myself — or the Political Economy of Distribution that Arjun Jayadev and I administer, have to be mostly neglected here as we concentrate on work published on INET’s own website in 2016.

Fiscal Paralysis and Political Turmoil

The simplest hypothesis to explain the shocking reversals that punctuated the year is that while economists and policymakers battled over the size of multipliers, the limits to debt, and the slopes of imaginary curves, the slow pace of economic recovery exhausted the patience of long-suffering electorates. That, at least, is not an outcome that can reasonably be pinned on INET. From the Institute’s earliest days, a steady stream of papers, blogs, and conferences warned that recovery from the 2008 catastrophe would not happen without serious use of fiscal policy. Adair Turner, Robert Johnson, Richard Koo, Orsola Costantini and many others — including Marc Lavoie and Mario Seccareccia — pressed versions of that case.

Inevitably, this inspired some INET researchers to take a deeper look at the real economics of John Maynard Keynes, which had focused on the central role of aggregate demand in determining national income. Many papers scrutinized the long process by which Keynes’ views were reinterpreted and, ultimately, almost inverted. Lance Taylor produced a particularly lucid and compact study that brought that reversal into pithy focus.

As the green shoots withered and Quantitative Easing failed to bring real recovery, INET encouraged exploration of the roots of “secular stagnation.” Adair Turner offered bold proposals designed to remedy that condition; Barry Cynamon and Steven Fazzari and other analysts debated what growth rates the US economy could reasonably aspire to. Developments since the election of Donald Trump and the sudden conversion of some deficit hawks to advocates of large-scale infrastructure programs make some of these earlier arguments look peculiar: Some Republican-oriented analysts now talk of achieving rates of growth that recall claims mocked in the debates over the economic program put forward by Senator Bernie Sanders. A 2015 INET piece by Cynamon and Fazzari on the impact of inequality on GDP growth now looks prescient

The Structure and Mechanisms of Inequality

Another area to which INET made a major contribution involves a central background factor shaping voter behavior in both the Brexit referendum and the US election: Inequality. Long before 2016, the Institute made substantial contributions to the World Top Income Database used by Thomas Piketty and other economists. It also supported studies by Joseph Stiglitz, James Galbraith, Lance Taylor, Duncan Foley, and others on the subject, as well as work by James Boyce and colleagues on environmental inequalities.

Sanjay Reddy, Arjun Jayadev, and Rahul Lahoti built an entirely new database permitting studies of consumption in many countries and threw it open to researchers.

The Economics of Politics

Many analyses of the stunning results of the Brexit and US presidential votes note the disgust of many ordinary citizens toward what they perceive as indifference to their economic plight by a self-serving elite benefitting from a corrupt and “rigged” political system. Several major INET working papers brought new empirical and theoretical evidence to bear on these questions. Ahmed Tahoun and Florin Vasvari, for example, showed that Congressional representatives sharply increase their borrowing and receive much more favorable terms from lenders after joining committees supervising finance.

Another paper took a close look at the relation between money and elections. Thomas Ferguson, Paul Jorgensen, and Jie Chen show that the outcomes of all Congressional elections for which we have the necessary data – that is, since 1980 – display strong linear relationships to total spending by the major political parties in each race. Drawing on some natural experiments and the Hueter paper on endogeneity and latent instrumental variables mentioned earlier, they also show that this empirical result — somehow missed by two generations of scholars — is not principally a result of money following polls or public sentiment: though that happens, money has powerful direct effects in its own right.

Various Institute researchers made other notable contributions via a steady stream of paper and blog posts. Lynn Parramore’s interviews and discussions notably widened the reach of the Institute’s research. Salon, Bill Moyers, the Huffington Post and many other major media sites published or adapted pieces she originally published on INET’s website.

INET also conducted long interviews with a variety of experts. One of these, with Luigi Pasinetti, became something of a sensation, attracting large numbers of viewers. One part of the Pasinetti interviews included Marcello de Cecco, whose untimely death was an enormous loss to economics and especially economic history.

To them, and all the researchers who have contributed to INET in the past year, we are deeply grateful. Were Hieronymus Bosch around to paint them today, we think they would deserve to be swept up with rest of the small group of the elect that he sometimes painted, off to one side, heading for heaven as the world fell apart.